``The exit strategy is painfully simple: Ultimately, it is up to Ben Bernanke – and whether he has both the wisdom and the courage to break the daisy chain of the “Greenspan put.” If he doesn’t, I am convinced that this liquidity-driven era of excesses and imbalances will ultimately go down in history as the outgrowth of a huge failure for modern-day central banking. In the meantime, prepare for the downside – spillover risks are bound to intensify as yet another post-bubble shakeout unfolds.”-Stephen Roach, The Great Unravelling
Figure 1: Chartoftheday.com:
Figure 2: stockcharts.com: Carry Trade Still At Work?
The inflection points (red arrow) of the Japanese Yen seems to ran inversely parallel to the turning points of the Dow Jones (blue arrows) and the JP Morgan Emerging Debt Fund (lower panel-blue arrows).
What this probably implies is that the carry trade is “back in business” and that the declining yen could have provided for the necessary fodder or ammunitions to restore the risk taking activities as reflected by the bounce in emerging market stocks and bonds, as well as in the other asset markets.
While it is to my opinion that the present behavior of markets have been simply cyclical, undergoing a natural corrective phase, then signs are that the
The Phisix also has been at the trails of its counterparts rallying 3.52% over the week, with the Peso nearing its record milestone high to close at Php 48.16 per USD over the week. Since we noted that the Phisix and the Peso has shown some relative strength, I will have to change my neutral view on the Phisix, once the Peso breaks its recent high at Php 48.03 to a US Dollar, to a buy.
Of course, IF the Yen have been a crucial factor in determining liquidity conditions allowing for today’s worldwide rally, one must be reminded that the downtrodden Japanese currency in spite of its recent flagging conditions has been drifting near its all time lows relative to the US dollar and the Euro as discussed last March 5 to 9 edition (see US Markets: Risks of Ponzi and Speculative Finance). Hitting support levels usually generate violent reactions which may once again lead to heightened volatility.
The question is IF the Yen has indeed BEEN a pivotal factor in determining liquidity flows.
Figure 3: Stockcharts.com/The Rhodes Report: Yen Volatility has led to Financial Market upheavals
Of course, others may argue that the recent rebound by the global markets have been due to statement changes by the US Federal Reserve, indicative of a potential shift in FED policy.
Figure 4: Federal Bank of
The market seemed quick to interpret this as carte blanche omission of further rate hikes and instead tilted the outlook toward a RATE cut, as shown in Figure 4. ``Interest-rate futures show a 28 percent chance the Fed will lower its target overnight lending rate between banks a quarter- percentage point to 5 percent on June 28” from a Bloomberg report.
In my view, the shift in the statement represents as INSURANCE, where if the US markets would feel the pinch from the ripple effects of the unwinding subprime mortgage implosion towards a greater segment of economy, the FED has made available its “BERNANKE PUT” option or readiness to deploy its contingent “liquidity of last resorts” measures. So those contending that US FED will not intervene have now been given a preview of what comes next. On the other hand, it also marks the concern of the FED over the degree of landing.
In the event that the
Yet, the bizarre part is how prices can persist to rise in view of an economic deceleration and declining trends in corporate profits. These shows of how distorted market pricing has been and how addicted the global financial economy have been to “low interest rates” and to the “massive creation and intermediation of credit, derivatives and digital money”.
Another timely reminder comes from, William Hester of the Hussman Funds, who warns that present expectations have been derived from conditions different from the past, ``In any case, investors should keep in mind that the stock market's reaction to Fed cuts has historically been dependent on other conditions such as valuations, economic expectations and the slope of the yield curve. The belief that rate cuts strongly benefit the stock market is based on conditions that don't match the present very well. It's possible that a Fed cut might help the stock market later this year. But given current conditions, history doesn't support much risk-taking based on that hope.”
Well, it’s hard to be overly optimistic knowing the possible risks of Damocles’ Sword hanging over the
2 comments:
Thanks for that analysis of our current situation. Perhaps it'll take through summer for the credit qualifications tightening to start being seen in the stats and longer still for bank profit be guided.
What "ACT"ions re the tape are you thinking of?
tnx curt
Hi Curt,
Thanks for your comments.
There are two dimensions here. One is fundamental which tell us about the prospective risks. The second is technical which tell us where momentum is headed for.
While we are aware of the fundamental risk side, we understand that momentum so far favors an upside considering most benchmarks (from US to emerging markets) appear to be on the mend.
By action, we mean designing trades that takes advantage of the upside, but at the same time watching developments in Fundamental side, this is where position sizing and exit strategies (regardless of gain or loss) are tactically paramount.
It also means that we have to keep vigilant on the parallel activities of the market such as the Japanese Yen and the response of the world market to its actions, and as you said, to watch the developments across the mortgages, banking or the general finance sector. Deterioration in the momentum should mean that fundamentals could be catching up.
Investing is a risk-taking activity therefore risks have to be measured by one’s approach to the market. There are events we can’t control, but we have our portfolio which we can manage.
Happy Trading!
Benson
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